Red Dog mine owner Teck reaches tax deal with borough

Red Dog mine officials look over the Aqqaluk pit, which extended the operation’s lifespan when it began producing lead and zinc in 2010. The mine owner Teck Alaska recently reached an agreement with the Northwest Arctic Borough on a new, 10-year payment-in-lieu-of tax that will result in annual payments ranging from $18 million to $26 million. (Photo/Courtesy/NANA Regional Corp.)

A contentious dispute over taxes is close to resolution between Teck Alaska, operator of the Red Dog Mine north of Kotzebue and the North West Arctic Borough.

A new payment-in-lieu-of-tax, or PILT, has been agreed to by Teck and borough administrators, and is expected to be approved by the North West Arctic Borough assembly. It would result in payments to the borough ranging from $18 million to $26 million per year for 10 years.

According to Teck’s annual financial filing, the new PILT will be about 30 percent larger than the last agreement.

A previous PILT agreement had Teck paying the borough about $8.6 million per year as well as a separate payment of $2.4 million per year to the North West Arctic School District, for which the company received a 50 percent state tax credit.

That agreement expired in December 2015. When negotiations on a new PILT broke down, the borough imposed a minerals severance tax that had been held in abeyance under the PILT. Teck then sued the borough.

The new severance tax would have increased the amount Teck pays the borough from $12 million in 2015 to an estimated $30 million to $40 million in 2016.

According to Teck, Red Dog supports 715 mine-related jobs with $75 million in annual payroll, and the company spends $160 million on supplies within Alaska each year.

More than 600 of the jobs are held by shareholders of NANA Regional Corp., the Alaska Native regional corporation for the area.

The controversy focused attention on a dispute that has long been simmering over whether the borough was getting a fair share of in-lieu payments from the mine to help support local services. With state funds for community programs being cut, the question assumed greater sensitivity.

Since Red Dog went into production in 1989 the relationship between the mine, which is the world’s largest zinc and lead producer, and Inupiat communities in the Northwest Alaska region has been amicable.

That’s mainly because NANA Regional Corp., the Alaska Native regional corporation based in Kotzbue, owns the land where the mine is built and receives royalties. By its 25th anniversary in 2014, royalty payments had topped $1 billion.

Those help bolster dividends paid to NANA to its shareholders. The royalties are also shared with other Alaska Native corporations.

The new PILT agreement functions in two parts. One is a proxy for a property tax where the mine will pay an annual payment, estimated at $14 million to $18 million per year, based on estimates of the value of Teck’s fixed assets at the mine.

This comes under a PILT because the borough has no property tax.

A second part of the agreement is an annual payment made by Teck into a new Village Investment Fund, with a first-year deposit of $11 million into the fund and subsequent payments that will be made on a percentage of Red Dog’s annual gross profit. The borough will administer the fund, with details yet to be worked out.

The intent is that the fund will help support community programs, services and local infrastructure. Sources close to the negotiations said that Teck itself proposed the Village Investment Fund.

Clement Richards, mayor of the borough, said he is pleased to get a proposal before the assembly to settle the dispute.

“The (borough) administration has worked hard to negotiate an agreement that meets the needs of our borough, which is of utmost importance,” he said.

Henri Letient, Red Dog’s general manager of operations, said, “The agreement will provide more resources for the people and communities of the region, while also supporting Red Dog’s ability to stay competitive and continue generating jobs and economic activity.”

Overall, Red Dog has been doing well. Zinc prices have increased in recent months and Teck Alaska’s latest financial statement for Red Dog shows that production at the mine has been generally steady.

The parent company, Teck Resources Ltd., reported profit of $1.1 billion in 2016 compared to just $188 million in 2015.

Zinc production in the fourth quarter of 2016 was up 7 percent, the report said, due to higher recoveries of metal from the ore in the mill at Red Dog, but lead production declined by 4 percent due to lower grades in the ore.

Production costs declined also due to lower fuel prices and optimization of the stripping ratio, or the volume of fill moved to reach the ore, at the mine. Production in 2017 is estimated at 545,000 tons of zinc and 115,000 tonnes of lead. A tonne, a common unit of measurement in mining, is 2,200 pounds, compared with a ton, which is 2,000 pounds.

From 2018 through 2020, production is estimated at 500,000 to 525,000 tonnes of zinc and 85,000 to 115,000 tonnes of lead, mainly due to lower grades of ore being mined.

Feasbility studies are now underway on ways to “debottleneck” the mill to improve metal recovery even as the grade of ore declines, according to the financial statement.

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Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected].